2022 (6) TMI 437 - AT - Income Tax

Interpretation of Income Tax Act: Employees' ESI/PF Deductions

Late Kari Thimmegowda Rajashekhara Versus DCIT, Circle – 5 [2] [1], Bengaluru, CPC, Bengaluru.

The appeal involved the interpretation of sections 36(1)(va) and 43B of the Income Tax Act 1961 regarding the deduction of employees' share of ... Delayed employees’ share of contribution to ESI/PF - HELD THAT:- Hon’ble Karnataka High Court in the case of Essae Teraoka Pvt. Ltd., [2014 (3) TMI 386 - KARNATAKA HIGH COURT] has taken the view that employee’s contribution u/s 36(1)(va) would also be covered under section 43B of the Act and therefore if the share of the employee’s share of contribution is made on or before due date for furnishing the return of income under section 139(1) of the Act, then the assessee would be entitled to claim deduction. In this case there is no dispute that the assessee made payment of the Employees share of PF/ESI on or before the due date for filing return of income for AY 2017-18 u/s.139(1) - The next aspect to be considered is whether the amendment to the provisions to section 43B and 36(1)(va) of the Act by the Finance Act, 2021, has to be construed as retrospective and applicable for the period prior to 01.04.2021 also. On this aspect, we find that the explanatory memorandum to the Finance Act, 2021 proposing amendment in section 36(1)(va) as well as section 43B is applicable only from 01.04.2021. These provisions impose a liability on an assessee and therefore cannot be construed as applicable with retrospective effect unless the legislature specifically says so. In the decisions referred to by us in the earlier paragraph of this order on identical issue the tribunal has taken a view that the aforesaid amendment is applicable only prospectively i.e., from 1.4.2021. We are therefore of the view that the impugned additions made under section 36(1)(va) of the Act, deserves to be deleted. - Decided in favour of assessee. Issues:1. Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act 1961.2. Applicability of newly inserted explanations by the Finance Act, 2021 to determine due dates for deductions.3. Distinction between employees' and employer's contributions to PF/ESI under the Act.4. Retroactive effect of the amendments made by the Finance Act, 2021.5. Judicial precedent and High Court decisions on the issue.6. Decision on the appeal filed by the L/R of assessee against the order dated 28.10.2021 of CIT(A)-11, Bengaluru, for Assessment Year 2019-20.Analysis:1. The appeal involved the interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act 1961 regarding the deduction of employees' share of contribution to ESI/PF. The Centralized Processing Centre (CPC) added a sum representing the employees' share, which the assessee contended was paid before the due date for filing the return under Section 139(1) of the Act.2. The CIT(A) considered the amendments made by the Finance Act, 2021 to Section 36(1)(va) and Section 43B. The newly inserted explanations clarified the due dates for deductions related to employees' and employer's contributions. The CIT(A) held that the amendments were declaratory in nature and applied retrospectively, upholding the addition made by the AO.3. The CIT(A) distinguished between employees' and employer's contributions under the Act, emphasizing that failure to pay the employees' contribution before the prescribed due date would permanently negate the employer's claim for deduction under Section 36(1)(va). In contrast, delay in the employer's contribution would result in deferment of deduction under Section 43B.4. The issue of retroactive effect of the amendments was crucial. The Hon'ble Karnataka High Court's decision in Essae Teraoka Pvt. Ltd. supported the assessee's claim that if the employees' share of contribution was paid before the due date for filing the return, the deduction could be claimed. The tribunal held that the amendments were applicable only prospectively from 01.04.2021.5. Judicial precedents, including decisions by the tribunal and High Courts, were referenced to support the interpretation of the provisions. The distinction between employees' and employer's contributions was acknowledged in various cases, reinforcing the legal understanding of the issue.6. Ultimately, the appeal of the assessee was allowed, emphasizing that the impugned additions made under Section 36(1)(va) deserved to be deleted. The decision was pronounced in open court on 19-04-2022, granting relief to the L/R of the assessee against the CIT(A)'s order for Assessment Year 2019-20.